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Javits & Sons's common stock currently trades at $30.00\$ 30.00 a share. It is expected to pay an annual dividend of $3.00\$ 3.00 a share at the end of the year (D1=$3.00)\left(D_1=\$ 3.00\right), and the constant growth rate is 5%5 \% a year.

a. What is the company's cost of common equity if all of its equity comes from retained earnings?

b. If the company issued new stock, it would incur a 10%10 \% flotation cost. What would be the cost of equity from new stock?

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Requirement a

We are asked what is the company’s cost of common equity if all of its equity comes from retained earnings.

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